Is Bangladesh Prepared to Graduate from LDC Status?

Bangladesh is scheduled to graduate from the Least Developed Country (LDC) status in 2026. Bangladesh exceeds the graduation thresholds in two of the three criteria -- Gross National Income (GNI) per capita and Human Assets Index (HAI). However, we are well under graduation threshold on the third criterion -- Economic and Environmental Vulnerability Index (EVI).

There are some concerns around Hasina regime's manipulation of economic data that has sparked intense debate. The White Paper on the State of the Bangladesh Economy presents these in great details. Critics argue that the regime's manipulation of key economic indicators, such as exports figures, GDP growth rates and possible undercounting of the population (as the denominator of per capita statistics) presents an overly optimistic picture of Bangladesh's economic progress.

That aside, there are other alarming signs, especially under the EVI criterion. For example, Bangladesh’s exports are heavily concentrated both in terms of products and markets. Around 85% of our exports are ready-made garments (RMG) which are shipped to a handful of countries. This is reflected in a merchandise export concentration index of 5.9. For a comparison, India, Pakistan, Sri Lanka and Vietnam all have much lower export concentration (between 2.16 and 3.22).

The Covid-19 pandemic has had a devastating impact on Bangladesh’s economy. Our economy has suffered tremendously, and the country was running a current account deficit until very recently. Foreign currency reserves fell to under 20 billion USD from a peak of 48 billion USD in August 2021.

The July uprising, which resulted in the ouster of the authoritarian regime of Sheikh Hasina, has nevertheless slowed down economic activities for a number of reasons. As the dust is settling, the ruins left behind by 15 years of graft, mismanagement and exploitation are coming into full view. Institutions have been demolished to the point that they are barely functioning, and hundreds of billions have been siphoned off out of the country.

Most economists in Bangladesh believe that Bangladesh must request deferment on the graduation from the LDC status until at least 2028. Here are some key justifications for why Bangladesh is not ready to graduate just yet:

•    Loss of preferential trade benefits: Bangladesh currently enjoys preferential market benefits, including duty-free and quota-free access to 38 countries, under the Generalised System of Preferences (GSP). The loss of preferences would expose our exports to significant tariffs, ranging from 10-15%. Graduating from LDC could lead to a loss of around 14% of export earnings, approximately $5.73 billion annually. Bangladesh’s export sector needs to become more resilient through diversification. We need to identify new export products and markets, and shift to higher value exports to remain competitive. We also need to explore free trade agreements (FTA) to access new markets.

•    Needs for structural transformations: We need to attract more foreign direct investment (FDI) by creating a more conducive business climate, improving infrastructure, and designing incentives. This requires some time and targeted policy interventions. 

•    Increased borrowing costs: Bangladesh's graduation would make the country ineligible for concessional loans and grants from development funds. This could increase the cost of borrowing, as non-concessional loans have less favourable terms and shorter repayment periods.

•    Impact on pharmaceutical industry: The country's pharmaceutical industry would lose access to the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which allows it to manufacture patented drugs without paying royalties.

•    Reduced development assistance: Bangladesh would forgo grants worth around $700 million over time, as well as other technical and infrastructural support from global partners.

The primary concern is the potential erosion of preferences in the global market, which could severely affect Bangladesh’s export-oriented industries, particularly the readymade garment (RMG) sector. This would undoubtedly undermine the competitiveness of our RMG sector, leading to substantial economic losses and potential job losses. Moreover, there are concerns that our country is not yet adequately prepared to withstand the challenges associated with graduation from LDC status, including its internal revenue generation infrastructure system which faces several challenges.

Other challenges include low tax-to-GDP ratio, narrow tax base, weak tax administration, inefficient VAT system, limited use of technology in tax administration (making it difficult to track and monitor tax payments), corruption and tax evasion, and lack of transparency and accountability. There is a lack of transparency and accountability in tax administration, making it difficult to track revenue collection and allocation. Moreover, corruption and tax evasion are significant challenges in Bangladesh, with many taxpayers avoiding taxes through various means.

Until these challenges are addressed, Bangladesh's internal revenue generation infrastructure system will not be ready to support the country's graduation from LDC status. In light of these concerns, the government has already been urged (by different quarters) to consider requesting a deferment of our LDC graduation. This would provide Bangladesh with a crucial window of opportunity to strengthen the economy, enhance competitiveness, and ensure a more sustainable transition to a developing country status.

The writer is advisor to the chairperson of the Bangladesh Nationalist Party (BNP) and former senior health specialist of the World Bank